Could these two monopoly businesses still generate solid returns?

These are companies that dominate their industries, holding a large share of the market with little competition. Because of their strong position, they can consistently generate steady profits, making them reliable choices for investors looking for stability and good returns.

So, why are monopoly businesses worth keeping an eye on?

Their market dominance ensures regular earnings and gives them the power to invest in growth and innovation. This makes them resilient, even when the economy faces challenges.

Also Read: For Fevicol maker Pidilite, its rich valuation could prove to be a sore spot

In today’s post, we’ll explore why these powerhouse companies should be on your investment radar and introduce some top Indian stocks that exemplify these qualities.

Pidilite Industries Ltd

Market share: 70% in adhesives

Historical 10-year compound annual growth rate (CAGR) stock return: 22%

Pidilite Industries' share price chart (November 2914-Nov 2024)

Pidilite Industries is a cornerstone in India's adhesives market, holding an impressive 70% market share.

In 2023, the company achieved robust growth, attributed to the quality of its product portfolio and effective execution strategies. Over the past decade, Pidilite has maintained a solid sales CAGR of around 11%. Its operating profit margins have remained stable at approximately 28%, the best among its competitors, and net margins have consistently hovered around 22%, showcasing one of the strongest performances in the industry. With a remarkable return on equity (RoE) close to 21%, Pidilite demonstrates exceptional efficiency in generating profits from its equity.

The company's growth has been largely attributed to the strength of its product portfolio and effective execution strategies. The management highlights that even amid challenging environments, such as fluctuating economic conditions in urban areas due to elections and monsoons, Pidilite has managed to sustain its growth.

Also Read: Bajaj Auto investors get a demand reality check

Additionally, the impact of food inflation on urban demand is being closely monitored, as it influences consumer spending patterns. Interestingly, Pidilite's demand is primarily driven by renovation projects (close to 70%) rather than new construction (close to 30%), providing a steady and predictable revenue stream.

Looking ahead, Pidilite is poised to pursue healthy double-digit underlying volume growth. The company plans to transform its portfolio to achieve a 55% focus on core business and 45% on growth segments. This strategic shift aims to capitalize on new demand drivers.

To support this growth, Pidilite is not rushing into broad market expansion but is instead focusing on winning in small towns and rural India. It's investing in brand building and educating consumers, areas that are critical for long-term market penetration and loyalty.

Pidilite anticipates maintaining its margins within a steady-state range of 20-24%, managing them on a quarter-by-quarter basis. To optimize profitability, promotional and advertising activities have been postponed to later quarters, allowing the company to better align its marketing efforts with market conditions. Additionally, Ebitda (earnings before interest, taxes, depreciation, and amortization) is expected to be higher due to reduced average selling price (ASP) spend, with margins anticipated to reach the higher end of the range in the fourth quarter.

Pidilite's stock is currently trading at a high price-to-earnings (P/E) ratio of 84X, positioning it as an expensive investment compared to industry peers. The critical question remains: Can Pidilite sustain its high valuation?

Also Read: Bajaj Auto's aggressive push threatens Ola Electric's EV dominance as share slips below 30% for the first time in a year

The answer appears promising, primarily due to Pidilite's strategic entry into two new segments: paints and non-banking finance. These ventures are still nascent, with management refraining from providing specific financial projections until March 2025. However, the potential for these segments to contribute significantly to the company's growth trajectory is substantial. If Pidilite successfully scales these new businesses at a healthy pace, it could generate returns for shareholders akin to its historical performance, justifying its high valuation.

Bajaj Auto Ltd

Market share: 77.9% in the three-wheeler segment

Historical 10-year CAGR stock return: 14%

Bajaj Auto share price chart (November 2014-November 2024)

Bajaj Auto is a prominent player in India's automotive industry, holding a substantial 77.9% market share in the three-wheeler segment.

Under the leadership of its management team, Bajaj Auto has strategically focused on driving top-line growth in emerging segments while maintaining profitability. The company's business strategy revolves around leveraging new growth platforms such as CNG two-wheelers, Chetak electric scooters, E-autos, and the Triumph motorcycle brand, which are creating significant opportunities in the market.

Bajaj Auto market share across segments (in %)

Over the past decade, Bajaj Auto has maintained a decent sales CAGR of around 8%. Its operating profit margins have remained stable at approximately 20%, and net margins are consistent at about 18%, showcasing one of the strongest performances in the automotive industry.

With a return on equity (RoE) close to 27%, Bajaj Auto demonstrates an efficient utilization of shareholder investments to generate profits.

Bajaj Auto's growth is further fuelled by the introduction of new products, such as the sporty 125cc Pulsar and NS400Z, which are expanding the company's market share. The management attributes the company's robust growth to the quality of its product portfolio and its effective execution approach.

Despite facing cautious urban demand due to factors like elections and monsoons, certain segments have shown robust growth, primarily driven by renovation projects rather than new construction.

Looking ahead, Bajaj Auto is cautiously optimistic about future growth and is actively investing in capacity expansion. The management is encouraged by other manufacturers planning to introduce CNG-powered two-wheelers, which aligns with Bajaj Auto's focus on leadership in the 125cc plus segment and a steady comeback in exports.

Innovation remains a key priority for Bajaj Auto, with significant investments in building new categories and piloting new products in restricted geographies before nationwide launches. The company is preparing to embrace various fuel technologies like CNG, LPG, electric, CBG, and ethanol to cater to diverse customer preferences.

Also Read: Bajaj Auto: CNG bike and exports to drive growth

Additionally, Bajaj Auto plans to significantly expand its electric three-wheeler range, with new products entering the market monthly.

Bajaj Auto generated over ₹2,000 crore of free cash flow during the quarter and invested about ₹1,200 crore in the first half of the year, primarily in Bajaj Auto Credit and capital expenditure (capex) for the electric vehicles business.

Bajaj Auto's market expansion plans include business expansion in Brazil and implementing localization measures beyond 20,000 units. The company has successfully achieved a 35% market share in a short period, showcasing its strong franchise strength.

The industry outlook remains positive, with management optimistic about potential growth. The expected industry growth rate is around 3-5%, and Bajaj Auto is well-positioned to capitalize on this through its strategic investments and focus on innovation. The company targets significant investment and assets under management (AUM) growth for its non-banking financial company (NBFC) entity, with a target AUM of about ₹10,000 crore by the end of the year.

Despite strong historical metrics, recent developments have introduced challenges for Bajaj Auto.

The stock currently trades at a high P/E ratio of 38X. After delivering over a 100% return in the past one year, the share price has declined by almost 20% following the latest quarterly results.

This downturn is attributed to increased sales being offset by pressure on profit margins. Does this mean margins have peaked? It's possible. The company faces potential downward pressure on margins in the coming quarters due to several factors.

While a recovery in export volumes is positive, the growth is driven by markets like Africa, where average selling prices and margins are lower. Additionally, an increase in the mix of EVs and CNG two-wheeler segments, which are margin-dilutive, could further compress margins.

In the near term, weakness in the domestic two-wheeler market could weigh on Bajaj Auto's financial performance, potentially limiting significant appreciation in the stock price.

Are these market leaders still investment powerhouses?

Pidilite Industries and Bajaj Auto have been the shining stars of their industries for years, each holding an impressive market share and delivering solid performances. They've built strong brands and have a history of innovation and growth.

But lately, they've encountered some challenges like increased competition, pressure on profit margins, and tough market conditions.

So, are they still the investment powerhouses we've come to know? It's a bit of a mixed bag.

On one hand, their track records suggest they have the resilience and strategic thinking to overcome these hurdles. They've navigated tough times before. On the other hand, the business environment is shifting in ways that could impact their future growth.

For more such analysis, read Profit Pulse.

Ultimately, whether they remain top picks for investors might depend on how they adapt to these changes. It's worth watching how they respond in the coming months. If they can leverage their strengths and innovate effectively, they could very well continue to be strong players. But as always, investing requires careful consideration, and it's important to stay informed about these companies' developments.

Note: We have relied on data from Tijori Finance and the respective companies' annual reports throughout this article. For forecasting, we have used our assumptions.

The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only. The views expressed are my own and do not reflect or represent the views of my present or past employers.

Parth Parikh has over a decade of experience in finance and research, and he currently heads the growth and content vertical at Finsire. He has a keen interest in Indian and global stocks and holds an FRM Charter along with an MBA in Finance from Narsee Monjee Institute of Management Studies. Previously, he has held research positions at various companies.

Disclosure: The writer and his dependents do not hold the stocks discussed in this article.